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As CEO and President, Joe Anderson has created a unique, ambitious business model utilizing advanced service, training, sales, and marketing strategies to grow Pure Financial Advisors into the trustworthy, client-focused company it is today. Pure Financial, a Registered Investment Advisor (RIA), was ranked 153 out of 715 RIA’s nationwide by total assets under management by [...]

Alan Clopine
ABOUT Alan

Alan Clopine is the CFO & Chairman of the Board of Pure Financial Advisors. He has been an executive leader of the Company for over a decade. As CFO he is responsible for the financial operations of the company as well as investor relations. Alan joined the firm in 2008, about one year after it [...]

Andi Last
ABOUT Andi

Andi Last brings nearly 30 years of broadcasting, media, and marketing experience to Pure Financial Advisors. She is the producer of the Your Money, Your Wealth® podcast and radio show, and moderator for the firm's digital events. Prior to joining Pure, Andi was Media Operations Manager for a San Diego-based financial services firm with a [...]

Published On
September 20, 2022

Answers to your questions on, of course, backdoor Roth strategies. Y’know, to get as much lifetime tax-free growth on your investments as possible. Plus, investing strategies: does it make sense to buy a property now and rent it out until retirement? How much of a single stock in your investment portfolio can you sell and pay no capital gains tax? The fellas also explain capital loss carryovers, inherited IRAs, spousal Social Security and delayed retirement credits, required minimum distributions, and they spitball on an appropriate allocation of bonds, domestic stocks, and international stocks.

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Show Notes

  • (00:58) Will Changing Jobs Blow Up My Backdoor Roth Strategy? (Jarrod, Houston, TX)
  • (04:18) Does This Pave the Way for an Easy Backdoor Roth Contribution? (Steve, steaming hot Texas)
  • (11:36) Should I Buy a Condo Now and Rent It Until I Retire in 2 Years? (Rob, Morristown, NJ)
  • (20:15) How is My Allocation of Bonds, Domestic Stocks, and International Stocks? (Brian, Albany, NY)
  • (23:33) How Much of This Single Stock Can I Sell and Still Pay No Capital Gains? (Eva, Maryland)
  • (28:17) What’s the Best Way to Use a Capital Loss Carryover? (Steve, San Diego)
  • (31:43) Required Minimum Distributions Explained (Kurt, Columbia, MD)
  • (35:46) How Are Inherited IRAs Taxed for Beneficiaries? (Ken)
  • (39:13) Spousal Social Security Benefits and Delayed Retirement Credits Explained (Hilberto, Mount Laurel)
  • (45:07) The Derails

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LISTEN | YMYW Podcast 325 – Capital Gains Tax Vs. Ordinary Income Tax Explained

Capital Gains Tax Vs. Ordinary Income Tax Explained: How Are Long Term Capital Gains "Stacked On Top" of Ordinary Income? YMYW podcast #325

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Transcription

Today on Your Money, Your Wealth® podcast 396, Joe and Big Al answer your money questions on, of course, backdoor Roth strategies. Y’know, to get as much lifetime tax-free growth on your investments as possible. And investing strategies: does it make sense to buy a property now and rent it out until retirement? How much of a single stock in your investment portfolio can you sell and pay no capital gains tax? The fellas also explain capital loss carryovers, inherited IRAs, spousal Social Security and delayed retirement credits, required minimum distributions, and they spitball on an appropriate allocation of bonds, domestic stocks, and international stocks. Visit YourMoneYourWealth.com and click Ask Joe & Big Al On Air to send in your money questions as an email or a priority voice message. I’m producer Andi Last, and here are the hosts of Your Money, Your Wealth®, Joe Anderson, CFP®, and Big Al Clopine, CPA.

Will Changing Jobs Blow Up My Backdoor Roth Strategy? (Jarrod, Houston, TX)

Joe: Got Jarrod from Houston, Texas writes in. “Seeing as this is the Backdoor Roth show-“

Al: Is it? Second question in a row about Backdoors-

Joe: I’m telling you. I could say something, but I’m not. I’m just gonna hold my breath here.

Al: Okay.

Andi: Good plan.

Joe: The Backdoor Roth Show. So terrible.

Al: Have you thought of changing the name from Your Money, Your Wealth® to The Backdoor Roth? Nope, this isn’t the question on Backdoor Roths, can’t answer it.

Joe: Oh God, Okay. “- I thought I’ll just ask you a question instead of doing my own research.” Alright, Jarrod. That’s what we’re here for. We’ll do the research for you. Free of charge. Because we’re the Backdoor Roth guys. “If I were to do a Backdoor Roth conversion early in the year, then change jobs later in the year and roll my pre-tax 401(k) into a Traditional Roth -“

Al: I think he meant Traditional IRA.

Joe: I know, But I’m just reading what Jarrod wrote here. He’s already insulting me with this Backdoor Roth show.

Al: So for our listeners, I think he rolled his 401(k) into a Traditional IRA.

Joe: No wonder why Jarrod had to call because he’s doing research. He’s like, yeah, I’m gonna, you know, roll my pre-tax 401(k) in my Traditional Roth-

Al: And actually, it rolled in the 410(k) into a tradition Roth-

Joe: -tradition Roth-

Al: So let’s change that to Traditional IRA.

Joe: “-would this blow up my Backdoor from a tax perspective given it’s all in the same year? Or do balances or lack of tax-deferral IRA balances at the time of convergence matter? Thanks for your answer and this great show. Keep it up.” Alright, Jarrod. You’re back in our good graces here.

Al: End on a high note.

Joe: So what he’s saying is that he doesn’t have any IRA dollars. And so he wants to do the Backdoor Roth.

Al: Yeah. Do it now while he’s got none.

Joe: He’s like pro rata rule aggregation rules? zero balance.

Al: Doesn’t apply.

Joe: Let’s go.

Al: I’m done. I heard the Backdoor Roth Show, I can do it.

Joe: The Backdoor Boys.

Al: However-

Joe: Oh my God.

Al: Yeah. It doesn’t work-

Joe: It’s just awful.

Al: – Jarrod, it doesn’t work because what the IRS does is they look at your IRA balances at the end of the year. So if you wanna do this Backdoor Roth early in the year, then you’d have- and you want it to stick, you’re gonna have to do your 401(k) rollover to a traditional IRA next year.

Joe: Yup. End of year balance. So that’s when the aggregation, pro rata rules come into effect. End of year balances also come into effect for like, RMDs the following year. So there’s a lot of different things-

Al: Yeah. If you ever noticed with IRAs you get a statement, I think it’s 5498, and it gives you your IRA balance and you’re thinking, I’m 37, why does IRS need to know that? Well, they kinda like to track it one thing, but at age 72, they absolutely wanna know what it is to make sure you took your required minimum distribution.

Joe: And they just started that. About 4 or 5 years ago?

Al: Yeah. I don’t know when. But it hasn’t been forever.

Joe: It didn’t seem like –

Al: I wanna say, like, 10 or 15 years, but whatever.

Joe: Yeah, you know, who’s counting?

Does This Pave the Way for an Easy Backdoor Roth Contribution? (Steve, steaming hot Texas)

Andi: Steven from steaming hot Texas.

Joe: Alright. Steven. “YMYW Gents. Steven here from steaming hot Texas. Love the show. And I’ve learned a lot from you lately.”

Al: Because our shows used to suck.

Joe: Yeah. Terrible before, last couple, I actually learned something.

Al: I was surprised. But I got something out of it.

Joe: “I have a good fortune of being ineligible to make Roth IRA contributions because of my income exceeds the limit. I’ve been wanting to pump more into my Roth IRA account and, of course, the Backdoor Roth contribution strategy has been on my mind.” Of course, it has, Steve.

Al: Because this is the Backdoor Roth Show.

Joe: “But there’s one problem. I have a sizable amount of pre-tax dollars already sitting in a traditional IRA account from a previous employer’s 401(k) plan. And I don’t wanna to deal with the hassle to navigate the pro rata rule and subsequently having a portion of my Backdoor Roth contribution be taxable.” Oh, okay. I’m gonna have to go through this again with this Steven. “I am curious if it would be possible to roll over the entire balance of my traditional IRA account into my current employer’s 401(k) account. Therefore, bringing my portfolio to zero balance and any pre-tax IRA dollars in paving the way for an easy Backdoor Roth contribution. From reading my employer’s 401(k) plan document-“ you read the document, Steven? My God. “- it looks like the plan itself may allow such a rollover. Curious to hear your flippant thoughts and ideas on this. What are some pros and cons? And what should I be thinking about while pondering this strategy? Thank you, Steven. Note, the Contact Us form on the website wouldn’t submit for me.” Imagine that.

Andi: Surprise, surprise.

Joe: Website sucks.

Andi: Which is interesting because the very next email we got was from the Contact Us form from somebody else. So apparently, the form likes some people and not others.

Joe: Okay. This whole Backdoor stuff drives me nuts.

Al: This is a easy question to answer.

Joe: Yes. You can roll it into your 401(k) and then do the Backdoor.

Al: And it works.

Joe: Okay. But it’s like oh, I don’t wanna pay tax. Everyone loves the Backdoor because it’s like, I’m not paying tax on my conversion.

Al: Right. It’s a sneaky way to convert without paying tax. So what’s the problem with that?

Joe: They pay tax on the dollars that went into the IRA to begin with. Right? And then they converted it and now it’s in a Roth. So it’s after-tax dollars.

Al: Yeah. So you take money out of your brokerage account, your savings account, that you already paid tax on, you put it into an IRA, contribute to an IRA, then you do a Backdoor Roth conversion. And that works. But the point you’re missing is you’ve already paid taxes on that money that’s in your brokerage account or savings account. A Roth conversion-

Al/Joe: – is the same thing.

Al: It just means you’re gonna pay the tax this year. You paid the tax already in another year.

Joe: It’s like people are missing such a wonderful opportunity to get money into a Roth, but they’re like, oh, I don’t wanna do it because I already have money in an IRA, and I gotta get this money out. I don’t wanna deal with the pro rata rules and the aggregation rules. So if you want to get $6000 in Roth IRA, and you already have a traditional IRA, convert $6000 from the traditional, put it into a Roth and pay your tax.
It’s a same effect. It’s the same tax. It’s the same same. Now you got $6000 into a Roth. Or better yet, maybe convert $10,000. Maybe $12,000. Or maybe $2000. It doesn’t matter.

Al: It doesn’t matter. Although maybe you inherited the money. You didn’t pay tax on it.

Joe: Okay. Well, I mean, there’s certain circumstances, of course. But I think people are looking at this backdoor strategy as like, this is such a cool move. Because now I can put money into a Roth IRA without paying taxes on it. But you can always put in money into a Roth and pay the same tax as if you did the Backdoor or non-Backdoor, unless you’re on the cusp of a different tax bracket.

Al: And so here’s another problem with this. And that is what investments does your 401(k) have? So let’s say you’ve got $400,000 in a rollover IRA. And you wanna do this strategy, so you can do the Backdoor, which I agree, it works. It does work. So you go to your 401(k). There’s 4 investment options that are terrible. So are you gonna blow your whole investment strategy just to get a couple extra dollars in tax-free? So take a look at the investments too.

Joe: So by all means, put the money in your 401(k). And then you can do the Backdoor Roth to your heart’s content.

Al: It does work.

Joe: But how about if he’s in a certain tax bracket where he could convert more. And stay in the 12% or the 22%.

Al: That’s really the bigger opportunity.

Joe: And then it’s like, okay well, here, you could still do a non-deductible IRA. And you could do the conversions. It’s your same IRA. All you would have to do is fill on an 8606 form. Yes, you’re gonna have to deal with a little bit of pro rata and aggregation rules. But who cares? Right? You can build basis in there. And then here’s another strategy you can do. You build basis in your IRA. Right? So the next 5 years, you put in your $6000 or $7000 into the IRA. And then you’re- then from there, you roll that money into your employer plan. Guess what? They won’t take the after-tax dollars. So you isolate the basis.

Al: It stays-

Joe: And you take the basis and you put that into a Roth. And then you roll the money out when you retire… I don’t know. There’s all sorts of different games you can play here.

Al: Sure. Remember how we used to say like a Roth contribution or Backdoor Roth- that’s like, we’re putting a little teaspoon into the Roth. How about the whole-

Joe: – dump track.

Al: Let’s empty a dump truck. That’s a Roth conversion. You do as much as you want.

Joe: I’d much rather had the flexibility and control to get more money into the Roth IRA because the tax is the same in this person’s situation. Is that he’s going to have after-tax dollars that goes into a Roth or he’s going to have a pre-tax dollars that’s never been taxed and he’s gonna convert that into a Roth and it’s gonna be in the same tax bracket. The same tax is gonna go to the IRS, but you could leverage it a little bit more if you’re in the IRA. But you’re gonna have to cut a check to the IRS next April to pay for the additional income that’s gonna show up from your conversion versus you already paid that… I don’t know. Maybe that’s a big deal to him. So I just wanna get it out there that it’s the same same in most cases. So yes, the backdoor is kinda neat and cool. But if you really wanna get money into a Roth, you could still convert $6000, it’s still the same tax.

Download the free Complete Roth Papers Package, register for our upcoming free retirement webinar, access other free financial resources,  read the episode transcript, and schedule a free assessment with an experienced professional on Joe and Big Al’s team at Pure Financial Advisors: you can do it all in the podcast show notes at YourMoneyYourWealth.com! In exchange for all this free and useful information, all that we ask is that you tell people about YMYW. Hit the share button, also there in the podcast show notes, to spread the love and share the knowledge! Click the link in the description of today’s episode in your podcast app to go to the show notes to get started.

Should I Buy a Condo Now and Rent It Until I Retire in 2 Years? (Rob, Morristown, NJ)

Joe: We got Rob from Morristown, New Jersey. “Love your show. You both are very funny.”

Al: Wow.

Joe: “Big Al, so funny.” He’s so funny. “Love your-“

Al: Can you imagine how funny this show would be without you?

Joe: It would be way more funnier. I don’t even know if that’s a right sentence. Is that just terrible grammar?

Andi: Yeah, totally.

Joe: It was just-

Andi: But that’s what makes so funny.

Joe: It was like more funner?

Al: Way more funnier.

Andi: Way funnier.

Joe: Funnier.

Al: Way funnier.

Joe: Let’s move on. “Love the subtle snarkiness.”

Al: Are we snarky? Well, you are.

Andi: You’re unsubtly snarky.

Joe: “I drive a 2017 Volkswagen Jetta- “more funnier. It’s not more fun.

Andi: More funny or funnier.

Joe: It’s funner. Something.

Al: No. But we know what you mean.

Joe: It’s terrible. People listen to this is like, this guy is a complete imbecile. They still write in. They still wanna listen-

Al: People switch stations when they hear you’re- it’s more funnier.

Joe: Oh my God. It’s like oh, the guy actually said that? and he manages finances for a living?

Al: Well, I’m good with money. Just not words.

Joe: It’s just embarrassing that I have to read all this crap out loud.

Al: But that’s why we love the show.

Joe: Okay. “I drive-“ when’s the last of time you listened to it?

Al: Been awhile.

Andi: Yeah. He was just talking about turning the dial on his podcast player, so it has been awhile.

Al: I was referring to our listeners.

Joe: Got it. “I drive a 2017 Volkswagen Jetta with a 153,000 miles. I’m 63 and would like to retire at 64, 65. And I’m divorced. I currently earn $135,000. I save $48,000 annually.” That’s a lot of money that he’s saving. “I have $225,000 in my 401(k), $25,000 in my Roth, $50,000 brokerage account. I max out my Roth IRA, 401(k), put $10,000 in a brokerage account and $45,000 in my HSA. I sold my house in January and currently rent. I earned $100,000 profit. I’d like to move to Philadelphia when I retire. Property there, in the part in the city that I’d like to live is between $300,000 to $350,0000, and estimated cost is $2300. Should I buy now and rent until I’m ready to retire? And I think I’ll need about $60,000 to live on and would like to wait till 67 to start taking Social Security, which would be about $42,000 annually. Should I buy the condo in Philly and rent until 65? And if I retire at 65, can I wait until 67 to take my Social Security? Love your show and appreciate your comments.” Alright. Rob from Jersey wants to go to Philly.

Al: Sure. I’ve got a cousin lives in Philly.

Joe: Alright. So he’s got- What’s the total amount here?

Al: Well, let’s see.

Joe: He’s 63- wants to retire at 67. So he’s got $250,000-

Al: – $250,000,

Joe: – $300,000- call it $300,000. And he’s saving $50,000 a year.

Andi: Actually, he wants to retire at 65.

Joe: Okay. Two years?

Al: Two years. Yep.

Joe: So he’s got- he’ll have what, $400,000 roughly? Good with that?

Al: Yeah. Because he’s saving $40,000. Yeah, that works.

Joe: Okay. And then he has $100,000 profit. Is that in the brokerage account? No. So he’s got $100,000 profit that’s sitting somewhere. Or did he spend it? Because he only has $50,000 in the brokerage account. I’m guessing the $100,000 profit from the sold house is separate from what his balance sheet is-

Al: Yeah. I think that’s right.

Joe: Okay. So he wants to buy the house and rent it out. And so let’s say, $300,000, $350,000. You take the $100,000 that he earned as a profit, and he’s gonna put that down and he has a $250,000 mortgage.
And then he thinks the all-in monthly cost is $2300.

Al: Yep. That’s what I think he’s saying.

Joe: Do you think he can- what do you think rent is for a condo in Philly? $1500? $1000? $2000?

Al: Good guess. I don’t know.

Joe: I don’t know.

Al: Yeah. Yep. I’d say if I had a guess, Yeah. That’s a good guess. $1500. So maybe it’s a little bit negative cash flow, maybe get a couple tax benefits. I would say this, if you already found the place you like, go for it. You’re not that much out of pocket. It’s only a couple years. If you’re trying to decide to buy now versus later, and you don’t have anything in mind, I guess, then the question is, do you think the market’s gonna go up or down and the answer- no one has any idea. Right? So it’s just a kind of a crap shoot there. But I would say if it’s gonna be your home, you’ve already identified where you want live and you found the place, go for it.

Joe: Let’s look at his retirement though. He wants to retire at 67. Or no, he’s retiring at 65 and waiting to take Social Security till 67. So that’s a two-year gap. Right? He’s living off of $60,000 a year. So at 67, he’s gonna be short $18,000. So he’s gonna need roughly $500,000 of liquid assets at age 67-

Al: Right, to make this work.

Joe: -to make this work. So if he only has $400,000 now, and then you’re gonna take $100,000 and put that down. He’s gonna be pretty short.

Al: It’d be a little bit short. And so-

Joe: And if he’s gonna take cash flow away from him depending on what the rent and what his debt service is or mortgage service, he’s super close.

Al: Yeah. But I’m just- I’m just saying, so let’s just use our- the numbers $1500 rent, $2300 negative. So what’s that? That’s $1800- It’s $800 a month times 12 months is what, $10,000. So $10,000 times two years, $20,000. So that’s what you’re gonna spend to do- to pull this off. Right? And so- and the fact that you’re kinda close, maybe think about it, but that’s- I still stand by my first statement, which is it’s- If you found the place you want, then I would go ahead and buy it. But if you’re telling me, should I buy now just because maybe it’s a good idea? Not necessarily, because you’re out $20,000.

Joe: Right. Yeah. You don’t wanna- Yeah. I agree with you 100% there.
If you find your dream condo in Philly, and you’re afraid that, hey-

Al: It’s gonna get away from you. Or it’s gonna be sold or whatever.

Joe: Then for sure, buy. But if you’re speculating to think the market’s gonna go up and then hey-

Al: – maybe I’ll do better?

Joe: Yeah. Should I buy now and then get the appreciation on the overall condo over the next couple of years. The market could still turn. I mean, interest rates now are lot higher. Interest rates could go down in the future, interest rates could go even higher in the future. There’s so many different unknowns over the next couple of years. So if this is a speculation play, we would say just wait till you retire. If this is like an emotional, hey I’m gonna live here for the rest of my life play and I love this house and I’m gonna, you know, have my memories here. And drink my Blue Moons, yeah, then, yeah. I agree with you, Al.

Al: And then the fact that maybe it’s a little bit short. I mean, does he- I guess does he talk about pensions? Is there pensions?

Joe: He’s got $42,000 of Social Security. He wants to spend $60,000. So he’s gonna need $18,000 from the portfolio.

Al: So no discussion of pension. So I agree. It’s a little tight.

Joe: So at $18,000, let’s say, at the 4%. He needs $450,000 of liquid assets to create $18,000 of additional income on top of the Social Security to get him to the $60,000. Plus he’s gonna be a little bit of tax on that, plus a cost of living adjustment. So, he’s close because he has the assets. He’s still saving $50,000 a year. So I don’t know, 65 might be a stretch. Maybe wait till 66, save that extra $50,000.

Al: That extra $50,000.

Joe: Then you’re not taking money from the overall account.

Al: Or maybe you figure out some sort of part time income or consulting or something to kind bridge the gap to Social Security.

Joe: Right. Because he’s gonna have to take $120,000 out of his account for two years before he takes Social Security.

Al: That’s a little tough.

Joe: Yeah. That will blow you up. You probably need to take Social Security, maybe a little bit earlier or work another year later.

Al: Yeah. I mean, ideally, ideally, you’d work another at least another year. Right?

Joe: Or work part time and make-

Al: Or work part time. So you’re not taking out of your portfolio. Maybe you’re not saving $50,000 a year. Right?

Joe: Yeah. Get a job in Philly making $50,000.

Al: Yeah. To cover your expenses or close to it.

How is My Allocation of Bonds, Domestic Stocks, and International Stocks? (Brian, Albany, NY)

Joe: “Hey Andi, Joe, Big Al. Thanks for your great comments on previous questions. And thanks for keeping the typical boring topic of finance fun.” That’s what we do, Big Al.

Al: That’s what we try to do.

Joe: Making fun of finance. “I’ve determined that a 70/30 stock bond fund is right for me. I’m really struggling with determining the right mix of international to keep in my equity mix. There’s a seemingly knowledgeable sources are all over the board. From 50/50 to 100/0. I’ve targeted the following mix and would appreciate your comments. 30% bonds/47% domestic stocks. Out of the domestic stocks, he’s gonna go 75% large, 11% mid, 14% small, 23% international. So 85% developed/15% emerging. Am I on track? Brian from Albany. Craft IPA or cheap white wine, no pets.” I think he’s fine. I mean, “am I on track?” What- I don’t know if you’re on track or not. Do I like your portfolio? Sure.

Al: The appropriate question is, is this a reasonable portfolio for 70/30 stock/bond mix, and I would say you’re spot on. I wouldn’t probably change anything.

Joe: That’s fine. I would say spot on.

Al: I think it’s spot on.

Joe: I would say it’s fine. It’s-

Al: Well, at least I’ll answer it this way. This is how- this is probably similar to what I would do in my portfolio if I wanna do 70/30. I can say that. Right?

Joe: Yeah. I like that.

Al: So I like the idea I have having twice as much domestic as international. I think that’s a good ratio. Is it the only ratio? No. Some people do zero. Some people do 50/50, but I like it. Right.

Joe: 2/3, 1/3-

Al: And I would do more developed international than emerging, but I like emerging markets. And I would- just by definition, you’re gonna be doing more large companies than mid and small, because there’s more dollars in large companies.

Joe: Yep. I don’t know. Then oh what’s- how much is in value?

Al: Yeah. We didn’t say that. We could go down to that level.

Joe: Brian, I think you have a lot of knowledgeable sources and they all are all over the board. Because you wanna make it specific to yourself.
You know what I mean, you wanna build a portfolio based on what your risk tolerance is, What target rate return that you wanna generate? How much money do you have? How much is- what’s the demand for the portfolio and everything else? So you wanna craft it- but if you’re looking at a generic 60/40, 70/30, or whatever, portfolio, Yeah, I think that’s –

Al: And the 70/30 portfolio is probably fine with someone that has several years to let it grow.

Joe: What was that book? Dan- didn’t Dan Solin…?

Al: Yeah.

Joe: It was The Perfect Portfolio.

Al: The Only Invest Book You’ll Ever Need, I think is what It was called.

Joe: Or The Only Portfolio You’ll Ever Need or… Yeah, The Only Investment Book You’ll Ever Need.

Al: I think so.

Joe: Yeah. I would look at that because then he gives different types of portfolios. It’s a quick read. It’s pretty good.

(Andi’s note: It’s The Smartest Investment Book You’ll Ever Read by Dan Solin.)

How Much of This Single Stock Can I Sell and Still Pay No Capital Gains? (Eva, Maryland)

Joe: Eva from Maryland writes in. She’s like, “Hey, I recently discovered your podcast and I really like it.” Killing it. I mean, I swear.

Andi: Well, we did hit 2,000,000 downloads. So thank you Eva, for adding to that.

Joe: 2,000,000 Wow.

Al: Wow. Okay, cool.

Joe: Yeah. We have 2,000,000 episodes. We just keep pushing-

Al: And your mom keeps down downloading every one.

Joe: Thank you, Ruthie. We just keep pumping out content like it’s crazy. “I’m single, retiring on December 31st and will not have any earned income in 2023. I plan to convert $54,725 from my tax-deferred account and sock it into my existing Roth IRA to stay in the 12% tax bracket, $12,950 of the converted amount applies to the standard deduction.” Look at Eva with the numbers.

Al: She’s got the numbers to the dollar.

Joe: She’s like dialed. It’s like, wow, no wonder why you really like this show.

Al: She likes my answers.

Joe: I know. She does. She’s like, oh, Joe’s arrogant. “I’ll be living off from sales of a single stock that I would be liquidating. It has appreciated over the many years. So I’m not really selling it low.” Oh, she’s classifying, since the market’s volatile. And she’s already thinking that we’re gonna be judging her, by selling the stock to live off of while the market’s down. How dare you? She’s like, well, it’s not really low, because I’ve accumulated a lot over the years.

Al: Right. Consider where it’s been. What do you think? Like Tesla? Apple?

Joe: Netflix. “My queue is-“ that stands for question, I think, Al.

Al: I think so. I’m following- by the way. You paused to see if I was following-

Joe: “- how much of a single stock can I sell and still stay in the 0% capital gain bracket?” Well, if you do the conversion of $54,725-

Al: – it’s zero.

Joe: – the answer’s zero.

Al: So if you don’t do the conversion, you could do $54,725 of gain. Not of value, of gain. Because that’s the problem with doing Roth conversions and capital gains, trying to stay into the 12% bracket. That’s the only time where you don’t wanna do capital gains on top of the other stuff. Because if you do that, then the capital gains are taxed at the 15%.

Joe: Yeah. 15%. So you pick one or the other, or a combination of the two.

Al: The combination of the two should add up to $54,725. I’m assuming your math is right. So we’ll go with that.

Joe: Oh boy.

Al: And if you’re $1 over, don’t lose sleep over. It you’ll pay $1 at 22%, not the whole thing.

Joe: Great question. Again, capital gains, Roth conversions, 0% tax bracket. Capital gains is 0% in the 12% tax bracket. We encourage people to take a look at conversions, especially in the 12% tax bracket, because it’s super cheap. So she’s thinking, yes, I like that. I want to get money out of my retirement account. I’ll pay the 12% tax bracket. I’m not gonna have any income. I’m gonna live off of this, a brokerage account that I made some money along the way. I gotta sell some of it to live off of. How much can I sell and pay 0% tax and still do the conversion? So Eva’s plan is gonna be alright, $52,000 of total income in a sense of conversion and capital gain to keep that capital gain 0%. Even though the capital gain sits on top of ordinary income, you don’t want that capital gain to push out of the 12% because then every dollar over that will be taxed at capital gains rate.

I compiled several of Joe and Big Al’s most helpful discussions on the mechanics of how capital gains are stacked on top of ordinary income into a single YMYW episode, #325, Capital Gains vs. Ordinary Income Explained – you can find it in the show notes for today’s episode. Also: bonds have historically been much less volatile than stocks and they have historically have provided ballast during stormy markets, so what the heck is going on with bonds this year? Read our latest blog post taking a closer look at bonds in an unusual year – that’s thanks to our Chief Investment Officer, Brian Perry, CFP®, CFA, at Pure Financial Advisors. Both the cap gains podcast episode and the blog on bonds are in the show notes at YourMoneyYourWealth.com. Click the link in the description of today’s episode in your favorite podcast app to get there.

What’s the Best Way to Use a Capital Loss Carryover? (Steve, San Diego)

Joe: I got Steve writes from San Diego, He goes “Hey, Joe, Al, Andi. Your show is the best.”

Andi: Yes sir.

Joe: Yes. “I listen to it all days on the weekends.” Oh Steve. Just- “I have $150,000 capital loss carry-forward in my brokerage account leftover from the dot com bust.” Wow.

Al: That’s too bad.

Joe: “I could deduct $3000 of that money each year from my ordinary income. At that rate, it would take me 50 years to zero out the balance. I’m wondering what’s the best way to leverage this money. I’ve heard that the carryover does not survive the individual. What if the account’s in the trust? I’ve also heard that you can use this money against capital gains in the same account. Not enough there and not enough profits. Or Roth conversions or RMDs or real estate sales. I’ll be 69 soon, will be taking my Social Security next year at 70. Got about $300,000 investments mostly in retirement accounts. I expect to be working past 70. I’m in the 24% tax bracket with a little in the 32%. I’ve got $200,000 in equity in my home and $300,000 left on the mortgage. No rental real estate, no pension. I’m thinking about two main ways to use this loss. One, Roth Conversions, maybe $50,000 a year for 3 years. Or two, RMDs, starting at 72. Are there other options? Does it make more sense to use the losses now for Roth conversions or wait for the RMDs?
Thanks so much. I’ve learned a lot from all of you. San Diego craft beers are pretty amazing. Enjoy Stone IPA.

Andi: Here last week in the show where you guys were talking about craft beers and Joe was like, no, not doing craft beers.

All: I really like Stone IPAs.

Joe: Really?

Al: But they don’t really like me that much. You’re talking about alcohol that doesn’t agree with you Andi?

Andi: Yep.

Al: So well, the first two suggestions don’t work.

Joe: Sorry, Steve. You’re SOL. So go back to Stone. Grab an IPA and sit down and listen to this answer.

Al: So capital losses only get to be used against capital gains, not ordinary income, except for that $3000 a year, which is a true statement. So Roth conversion for $50,000, that’s ordinary income. You cannot use your capital loss carry-forward. RMD, required minimum distribution, starting at 72, that’s ordinary income, you cannot use it against that capital loss. What you can use it against is other capital gains, whether it’s related to stock sales, real estate sales, your home, if you have any rental property, things of that sort. Yes, you can use it for that. It does not survive you when you pass away. Unfortunately, you can’t just put it in a irrevocable trust. That’s a different entity. It sticks with you. You could set up a living trust, but it still doesn’t survive you.
So there’s really no other way to use it except for the $3000 a year against ordinary income or against other capital gains.

Joe: Well, if it’s a joint account, it would carry over for both lives.

Al: Both lives, if it’s a joint- you bet. So is he married? Did he say?

Joe: I don’t think so.

Al: If you’re not married, you could get married that would- to someone really young- and then it would survive.

Joe: Yeah. That would extend it. Alright. Sorry, Steve. Capital losses do

Required Minimum Distributions Explained (Kurt, Columbia, MD)

Joe: Let’s go to Kurt from Columbia. “Hey Joe and Big Al. Been listening to your podcast for the last couple of years. Helped a lot with my retirement planning. Had a couple questions on RMDs. I thought I heard before that if you take partial withdrawals throughout the year for your RMD, you can delay paying the taxes for all the withdrawals until the last withdrawal the IRS will consider that up having paid the taxes for their early withdrawals at the time of those withdrawals.” So he’s got an RMD that needs to be satisfied for the year.

Al: Sure, which you can do beginning of the year, end of the year, each month.

Joe: Middle of the year, each month.

Al: Yeah. How ever you want to, doesn’t matter.

Joe: And so he’s like, we can delay paying the taxes for all withdrawals until the last withdrawal.

Al: That’s true only if you have the taxes withheld. Because if you have to make estimated payments, they know exactly when those estimated payments were and you could be penalized. But if you have the tax withheld from the IRA, then sure, the IRS has no idea. They just know you had x number of dollars withheld last year. They don’t know when it was withheld.

Joe: So if you withhold 20% on each distribution or 10% or 30%-

Al: – or nothing for 6 months and then 20% for the last 6 months whatever, that does work. If you’re making estimated payments, that’s totally different because the IRS knows exactly when those payments were made.

Joe: Alright. “If you delay taking your RMD for the year you turned 72 until April of the following year, can you delay paying the taxes on that delayed RMD until you pay the RMD for the year that you turn 73 later
without running afoul of the IRS?” What the hell are you talking about, Kurt? If you don’t take a distribution, you don’t have to pay the tax. So if you delay the RMD until April 1st the following year, then you have to take two RMDs. If you take two RMDs when you turn age 73, then the taxes are owed when the distributions are made.

Al: So the answer is you pay the tax on the year of distribution. So you don’t have to pay the tax at age 72 because you didn’t take the distribution, but you gotta pay taxes on two RMDs the following year.

Joe: So run afoul.

Al: If you do that, you won’t run afoul. That’s good way of saying that. Hey, what else do we- got one more question?

Joe: “Since you must take your RMD first before you withdraw any other money each year, can you still do a Roth conversion withdrawal in the year you turn 72 if you delay the RMD that year until April the following year? Thanks. Kurt. P.S. I drive a 2013 Hyundai Santa Fe Sport. And drink… Yoogenlugin?

Andi: Yuengling.

Joe: Yuengling Lager beer.”

Al: Yeah your guess is good mine. Maybe it’s Yingling.

Joe: Yingling. Alright whatever. “No pets.” Kurt, get a pet. Yes. You could still do a Roth conversion even if you have to take an RMD. You take the RMD first and then you can do the conversion.

Al: But if you don’t take the RMD at age 72, then you don’t take an RMD, so you can still do a Roth conversion in that year.

Joe: 73. You take your RMD. You can still do a Roth conversion as long as you satisfy the RMD first.

Al: On both RMDs.

Joe: Correct.

Al: For that year.

Joe: And then at age 74, you can still do a conversion as long as you take your RMD, 75, 76, it doesn’t matter. So once you turn 72, that doesn’t mean the Roth conversion shuts off. You just have to satisfy the RMD first, take that out. And no, you cannot convert an RMD. It’s a distribution, has to come out. You gotta spend it or put in your brokerage account.

Al: Yeah. I think he’s wondering if delaying the RMD messes up the year 72 and it doesn’t.

Joe: Got it. Ying Ling. I’m gonna try that.

Andi: You might wanna do the next one?

Joe: Oh, okay. K. Let’s skip to that.

How Are Inherited IRAs Taxed for Beneficiaries? (Ken)

Joe: Ken writes in. “Joe and Al. I have two separate IRAs, one non-deductible and one regular. They’ve always been in separate accounts, but I fill out an 8606 form when I take RMDs. These IRAs have separate beneficiaries. They’re not related to each other.” Figured so much. That’s why you got two separate ones.

Al: Right.

Joe: “How is each IRA taxed after inheritance? Do each need a copy of my latest saving 8606 form? Would it be better if I empty one account through RMDs? Thanks, Ken.”

Al: Well, it wouldn’t be better for the beneficiaries of that IRA.

Joe: But it’s pro rata anyway. You got the aggregation and pro rata rules working against you. So let’s say I have this one IRA, and it’s worth $100,000 and adds $50,000 of basis. And I have another IRA worth $100,000 and it has zero basis. The IRS looks at it as you have $200,000 of IRAs with $50,000 of basis, and they’re gonna do that calculation on the pro rata if you inherit, or if you have it now. So you don’t necessarily want to have two separate IRAs like that. Because how they probably look at it is- I guess the only reason why you would wanna have two separate IRAs for beneficiary purposes is if one’s what, a charity or once a non-designated beneficiary?

Al: Maybe or just you just wanna have different- maybe that’s your sole asset. And you wanna have different beneficiaries.

Joe: But let’s say I have one IRA and I have two beneficiaries on the IRA.

Al: But maybe one IRA is $1,000,000 and those are your favorite people. And then one is, like, $10,000. That’s the people that you don’t like as much.

Joe: I could still put 99%-

Al: I know you could.

Joe: -to so and so and then 1% to the other.

Al: I don’t know. Who knows. I can’t think of too many reasons either. But I think your point is the correct one, which is IRS looks at IRAs as if they were one IRA. That’s why you fill out only one form 8606, which records the tax basis in your IRAs- in the aggregate. Doesn’t matter how many IRAs you have, it’s all considered one IRA. And I guess to answer the question, one of the questions, is yeah, each beneficiary should get a form 8606. Because no matter which IRA it is, it’s considered the same in terms of tax basis relative to the total value.

Joe: Right. So in my example, you have $200,000 total IRA, one IRA has 50% basis, the other has zero basis. Kenny passes away and then $100,000 goes to one beneficiary, the other $100,000 goes to the other, they would get $25,000 a basis in each them.

Al: But- that’s correct.

Joe: I don’t know why you would wanna keep it separate- keep it separate, but just understand that they’re not treated as separate from an IRS tax perspective. If you’re- because we would have people like, trying to game the system and say, hey, I’m gonna convert this IRA because it has $50,000 of basis. And I’m not gonna convert the other IRA, and I’m only gonna report the gain on this IRA as I convert it. And it’s like, well, that’s why there’s the pro rata and aggregation rules because they’re looking at all IRAs as one.

Al: Correct. But a lot of people don’t know that. So hopefully, we just educated them.

Joe: Oh my gosh. We’re just nonstop education here.

Spousal Social Security Benefits and Delayed Retirement Credits Explained (Hilberto, Mount Laurel)

Joe: I got Alberto from- you said it little bit differently. Is it Alberto?

Andi: Hilberto.

Joe: Ooo, wow. Okay. I knew that was coming.

Andi: I’m guessing. I’m hoping that that’s close, based on my high school Spanish.

Al: Hilberto.

Joe: From Mount Laurel. Alright. “Hey Big Al. So this goes- here’s you-

Al: Oh hey, Hilberto.

Joe: “My wife is on SSDI.” Oh, God. We got all sorts of acronyms here.

Al: Social Security Disability Income.

Joe: Alright. “She will be FRA-“

Andi: Full Retirement Age.

Joe: “-66. In 4 months-“

Al: Yeah. Full retirement age, we should translate these.

Joe: “Her SSDI will convert to FRB-”

Andi: Full Retirement Benefits

Joe: “- in March.”

Al: Got it.

Joe: “Question-“ if he’s already using these types of acronyms, I mean, he’s gotta know the answer.

Al: He’s testing us.

Joe: He’s just testing us.

Al: He’s testing me because it’s to me.

Joe: Yes.

Al: I’m not sure I’m going to know the answer.

Joe: “Does she have to withdraw her FRB in order to receive DRCs?”

Al: What’s a DRC?

Joe: That’s a delayed retirement-

Andi: Delayed Retirement Credit.

Al: Okay. Got it.

Joe: “Will she be able to claim spousal benefits at her FRA then claim her benefits at age 70?” No. Before she claims spousal of benefits, you have to be claiming your benefits. So if you claim your benefits, she can claim the spousal benefit. But she’s already claiming SSDI which is the Disability Social Security, then when she turns to her Social Security age, it’s gonna flip to that benefit.

Al: Yeah. Exactly. So that’s what- if you’re getting Social Security Disability benefits, at your full retirement age, which in this case is-

Joe: So she could pause those benefits-

Al: It would be the same. Yeah.

Joe: -and then take the spousal benefit because I believe- I don’t know- I’m just totally making this up. Because the rules changed quite a bit. So let’s say if- because if I’m taking DI benefits, can I- I believe you can pause the DI benefits and take his spousal benefit and let her credits role.

Al: Her DRCs?

Joe: DRCs. What the hell. But I’m, like, 70% there.

Al: Yeah. And I can honestly say, I don’t know the answer to that.

Joe: “Will she be able to claim the spousal benefits at her FRA then claim her benefits at age 70?” To claim her spousal benefits, you have to be claiming. But then she can’t flip back to her own benefits because I think it’s deemed. Right?

Al: It is deemed. And that changed in 2014, 2015, somewhere in there.

Joe: So people would like file and suspend. And so one spouse would file for their benefits and suspend them and then they would get their DRC, their delayed retirement credits-

Al: – while collecting the spousal.

Joe: And then the spouse would be able to claim the spousal benefit because like I said, to claim spousal benefits, your spouse needs to be claiming. But I don’t wanna claim because I wanna have it at age 70 versus age 66 or 67, so they would file and suspend those benefits. So I think he’s getting confused maybe with the old rules-

Al: Well- and depending upon what source he looked at because that was the strategy for a long time.

Joe: “I’m currently 60 years old and 4 months. Question, does my wife have to wait until I apply for Social Security benefits for her to apply for spousal benefits or can she apply at her full retirement age.” No. To get spousal benefits, again you have to be claiming your benefit. “If I take my Social Security benefit at 62, will I be able to suspend them at full retirement age 67 and apply for spousal benefits while I receive DRCs until age 70?” No. “Will I have to apply for my retirement benefits or will they start automatically at 70? Thank you for your guidance on these questions.” Call the Social Security Administration, Hilberto. I mean, you’re using all sorts of acronyms and you got- he’s got a strategy in place here. I don’t think it’s going to work. He’s trying to double dip or triple dip the system. And so it’s like, okay, well, I’m gonna claim my benefit then I’m gonna suspend them then I’m gonna claim them again and then I’m gonna get my delayed retirement credits. All of that gaming of the system doesn’t necessarily work anymore.

Al: Yeah. And so many people did that. And that’s why they came up with this new rule. I think it was 2015.

Joe: The only thing that I’m not sure of- everything else you can’t do, Alberto. Or Gilberto.

Andi: Hilberto.

Joe: Thank you. That sounds so good. Is when the Social Security- because, those are two different benefits. Even though they kinda roll into the same benefit that’s the same amount. I’m thinking that you could stop the Social Security-

Al: – to get your delayed retirement credits. And get more at 70. And that’s, as I said, I don’t know the answer to that one.

Joe: Well, good question. We’ll continue on.

The Derails

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YMYW seriously gets the giggles, Joe the IT guy, and drinking wine in the Derails at the end of the episode, so stick around. 

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